Tag: non-compete

New Year, New FTC Chair, and Renewed Focus on Non-Compete Agreements

 Anthony B. Haller, Theresa A. Topping, and Kevin M. Passerini ●

It is nearly impossible to think about the Federal Trade Commission (“FTC”) without thinking about the chaos caused by the non-compete ban it approved last year over vociferous dissent only to have the ban vacated and set aside nationwide by the Northern District of Texas. Curiosity remains about what the impact of the change in administration will have on the FTC’s approach to this issue of paramount importance to employers. But with President Trump’s appointment of Andrew Ferguson to lead the FTC, what follows is some insight on the current state of play and the FTC’s probable mindset.

Where We Were Last Year

As a recap, the FTC’s “Final Rule” announced on April 23, 2024, would have banned nearly all non-compete provisions and provisions functioning as non-competes (in the FTC’s view). That Final Rule, which was set to go into effect on September 4, 2024 (the “Effective Date”), would have impacted not only traditional restrictive covenant agreements with employees and contractors but likely also agreements with employee equity holders as well as claw-back and repayment agreements with employees presented with signing bonuses or training and education opportunities.

As expected, businesses and trade organizations swiftly challenged the Final Rule, with lawsuits filed against the FTC in Pennsylvania, Florida, and Texas seeking to set aside the Final Rule: a lawsuit brought by a tree-service company, ATS Tree Services, LLC in the Eastern District of Pennsylvania; a lawsuit brought by the Properties of Villages Inc.in the Middle District of Florida, and lawsuits brought by tax-advisory firm Ryan, LLC and the U.S. Chamber of Commerce in the Northern and Eastern Districts of Texas, respectively. The lawsuits yielded distinct outcomes. The Texas court preliminarily enjoined enforcement of the Final Rule as to the plaintiff only, pending a final ruling on the merits. The Pennsylvania court upheld the Final Rule. The Florida court preliminarily enjoined the Final Rule as to the plaintiff only, on similar but not identical grounds to the Texas court, even while accepting some of the Pennsylvania court’s analysis.

The limited holdings and contradictory outcomes made the chaos sewn by the FTC even worse in the weeks leading up to the Effective Date. Ultimately, the Texas court provided clarity, issuing its final ruling on the merits and vacating and setting aside the Final Rule nationwide holding that its issuance was outside FTC’s authority granted by Congress and that the Final Rule was otherwise arbitrary and capricious under the Administrative Procedure Act. The FTC has appealed both the Florida and Texas rulings, and the plaintiff in the Pennsylvania ruling voluntarily dismissed its lawsuit after the Texas court ruling.

Continue reading “New Year, New FTC Chair, and Renewed Focus on Non-Compete Agreements”

New York State Legislature Sends Broad Noncompete Ban to Governor’s Desk

Kevin M. Passerini and Anthony A. Mingione ●

On June 20, 2023, the New York Assembly passed a bill already passed by the Senate banning all post-employment noncompete agreements with workers. The bill is headed to Governor Kathy Hochul’s office for her approval. Governor Hochul has voiced her support for a much narrower, income-targeted ban on noncompetes, but she has not previously voiced support for this broad a measure. While it is possible she may decline to sign the ban and insist upon amendments, many expect her to sign it, particularly given the overwhelming vote it received in both legislative houses.

More specific details of the noncompete agreement ban include:

      • The ban has no compensation threshold or exception for executives.
      • The ban covers all employees and independent contractors (and, through the vague definition of “covered individual,” may include other service providers/consultants and even workers who are partners, members, or other equityholders).
      • The ban appears focused on only traditional noncompetition agreements, despite the odd prefatory language stating, “Every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” The sentence that follows that pronouncement focuses on “non-compete agreement” (the defined term in the act); and the act expressly indicates that it is not intended to apply to certain non-solicitation provisions, confidentiality agreements, and agreements providing for a “fixed term of service,” provided that those agreements “do not otherwise restrict competition in violation of” the act.
      • The ban appears not to be retroactive since the bill it is amending states, “This act shall take effect on the thirtieth day after it shall have become a law and shall be applicable to contracts entered into or modified on or after such effective date,” and comments on the floor of the Assembly during last week’s debate and vote confirm that.
Continue reading “New York State Legislature Sends Broad Noncompete Ban to Governor’s Desk”

NLRB GC Declares (Virtually) All Non-Compete Agreements Illegal

Jason E. Reisman  ●

Snapshot Summary

Yes, the National Labor Relations Board (“NLRB”) General Counsel (“GC”) says virtually all non-compete agreements are illegal. However, although this is the GC’s strong personal view, she does not directly make the law or establish precedent—NLRB action is still required to start that process. Even if the NLRB acts, the National Labor Relations Act (“NLRA”) only covers non-supervisory employees. This is something to monitor, but not something that should cause you to automatically refrain from strategic and reasonable use of non-compete agreements. And, yes, it coincidentally aligns with the proposed rule from the Federal Trade Commission (see our prior alert here).

Background

Though employers uniformly do not enjoy listening to the ruminations of NLRB GC Jennifer Abruzzo, it is clear that all employers need to pay very close attention to what she says and how she says it. The latest off-the-wall proclamation came in a May 30 memorandum, where she asserted her position that non-compete provisions contained in employment contracts and severance agreements nearly always violate federal labor law by preventing former employees from working for competitors. Notably, she previewed this position in March when she issued another memo providing “guidance” on severance agreement provisions in the wake of the NLRB’s McLaren Macomb decision (see our prior blog post here).

Continue reading “NLRB GC Declares (Virtually) All Non-Compete Agreements Illegal”

New D.C. Noncompete Law to (Finally) Take Effect October 1

Kevin M. Passerini and Daniel L. Morgan ●

The Ban on Non-Compete Agreements Amendment Act of 2020 (the “Act”) passed by the D.C. Council over the summer will take effect on October 1, 2022, imposing new substantive and procedural restrictions on D.C. employers’ use of noncompetes, new compensation thresholds below which such noncompetes are now banned, and creating new administrative and civil enforcement measures, including administrative penalties for noncompliance.

The New Law in a Nutshell

The Act defines “noncompete provision” as “a provision in a written agreement or a workplace policy that prohibits an employee from performing work for another for pay or from operating the employee’s own business.” Consequently, the law covers both agreements containing noncompetes and workplace policies restricting employee’s competitive or outside activities, subject to several exceptions summarized below.

Most notably, the Act imposes two new income thresholds for “noncompete provisions” with “highly compensated employees”—those who earn at least $150,000—and “medical specialists”—licensed physicians earning at least $250,000. Both thresholds are subject to adjustments in accordance with increases in the Consumer Price Index beginning in 2024, and any “noncompete provisions” with employees below those levels are effectively banned by the Act.

The Act clarifies that wages, salary, bonuses or other cash incentives, commissions, overtime premiums, vested stock and restricted stock units, and other payments provided on a regular or irregular basis may all be included in determining who qualifies as a “highly compensated employee.” The Act excludes the value of noncash fringe benefits, but because it does not define “fringe benefits,” there is uncertainty as to what noncash benefits may constitute “other payments provided on a regular or irregular basis.”

To read the full client alert, please visit our website. 

D.C. Moves Back Applicability Date of New Non-Compete Law

Daniel L. Morgan and Kevin M. Passerini

Earlier this year, Washington, D.C.’s mayor signed legislation, the “Ban on Non-Compete Agreements Amendment Act of 2020” (the “Act”), which imposes sweeping limitations on during-employment and post-employment non-compete agreements for employees in the District of Columbia. We previously reported on this legislation.           

Although the Act stated that it was to take effect following its publication in the District of Columbia Register, it also included the following provision: “This act shall apply upon the date of inclusion of its fiscal effect in an approved budget and financial plan.”

In other words, notwithstanding the Act’s definition of an earlier effective date, the Act was not slated to go into effect until the date it was included in D.C.’s 2022 budget—referred to as the “applicability date”—which most expected to occur by October 1, 2021. Shortly after passage, there were rumblings that Council members were considering amendments to the law—ranging from, among other things, a delay in the applicability date to exemptions for bona fide conflict of interest policies to income thresholds for the ban on non-competes, as opposed to an outright ban.

On August 10, 2021, the D.C. Council approved a budget—signed by D.C.’s mayor on August 23, 2021—that delays the applicability date of the Act until April 1, 2022. This postponement is significant because the Act’s limitations on non-competes is not retroactive, which provides employers with more time to continue to enter into non-compete agreements that satisfy the existing standards for determining the enforceability of non-compete restrictions rather than the far more limiting standards included in the Act.

Time will tell whether any substantive amendments materialize and modify the Act’s limitations prior to April 1, 2022.

D.C. Mayor Signs Non-Compete Ban, Dramatically Alters Competitive Landscape

Kevin M. Passerini and Daniel L. Morgan

Late in December 2020, the District of Columbia Council passed legislation titled, “Ban on Non-Compete Agreements Amendment Act of 2020” (the “Act”), barring the use of non-compete agreements and workplace policies that restrict D.C. employees from competing with their employers after, and even during, employment. This week, the Mayor signed the law. Barring an unlikely intervention by Congress (which has authority to review legislation passed by the D.C. Council), the law will take effect after the 30-day Congressional review period.

This Act follows a recent, growing trend to limit the use of non-competes, but it goes further than other recent legislative efforts: it applies to employees at all income levels and even bars the use of “during-employment” non-competes and workplace policies such as those aimed at preventing disloyalty and abuse of company resources. Several key areas warrant emphasis.

Ban Applies to Employees Performing Work in D.C. for Employers that Operate in D.C.

The Act applies to “employees,” defined as any “individual who performs work in the [District of Columbia] on behalf of an employer and any prospective employee who an employer reasonably anticipates will perform work on behalf of the employer in the [District of Columbia].” The term “employer” is defined as “an individual, partnership, general contractor, subcontractor, association, corporation, or business trust operating in the District, or any person or group of persons acting directly or indirectly in the interest of an employer operating in the District in relation to an employee, including a prospective employer.”

Continue reading “D.C. Mayor Signs Non-Compete Ban, Dramatically Alters Competitive Landscape”

New Maryland Law Prohibits Non-Compete Agreements for Lower Wage Workers

Daniel L. Morgan

If you’re an employer in Maryland, beginning October 1, 2019, you are prohibited from requiring a low wage worker (defined as someone earning less than $15/hour or less than $31,200/year) to sign a non-compete agreement with your company. Maryland’s law follows a national trend in which a number of other states have either passed or are considering similar legislation. Among those states that have already passed legislation preventing employers from enforcing non-compete agreements with lower paid employees are Illinois, Maine, and New Hampshire.

As a cautionary note, Maryland’s new law does not grandfather existing non-compete agreements with employees whose earnings bring them within the purview of the new law, which means that those agreements will become unenforceable after the law takes effect. Continue reading “New Maryland Law Prohibits Non-Compete Agreements for Lower Wage Workers”

Third Circuit Indicates Support for Use of Broader Restrictive Covenants in Post-Hire Agreements Rather Than a Uniform Approach at Hiring

Kevin M. Passerini

We wrote an earlier post about the Third Circuit’s opinion in ADP, LLC v. Rafferty, et al., confirming courts’ blue penciling authority (see here); but the Third Circuit’s analysis of ADP’s two-tiered restrictive covenant structure is also worth discussing, as it may have employers doing some head scratching.

Why the focus on ADP’s two-tiered contracting approach?

ADP’s first-tier agreements for new hires included confidentiality obligations and a one-year customer non-solicit tailored to the employee’s assigned role and contacts, but no non-compete. ADP’s second-tier agreements (used in connection with stock incentives offered to high-performing employees) added a one-year territory-based non-compete and broadened the scope of the one-year non-solicit to include all customers and business partners for which ADP has provided services and all prospects for which ADP reasonably expects to provide services during the two-year period following the employee’s termination—regardless of the employee’s responsibility for them or access to confidential information about them during employment. Continue reading “Third Circuit Indicates Support for Use of Broader Restrictive Covenants in Post-Hire Agreements Rather Than a Uniform Approach at Hiring”

We Are Hiring: PA Superior Court Upends the Law on “No Hire” Agreements

Scott F. Cooper

Countless companies contract with other companies to provide services and include a “no hire” provision (pursuant to which the parties to the contract agree to not hire employees of the contracting company) in the service contract. The goal of these provisions is to prevent the contractual business partner from raiding the other’s talent—at least not without paying a fee.

In what the Court acknowledged was the first test of this issue in Pennsylvania, earlier this month the Superior Court invalidated a “no hire” agreement between companies—even though they were not competitors. The Court reasoned that companies may enter into agreements barring solicitation of customers, but they cannot agree to “no hire” provisions. Non-compete agreements between employer and employee are still valid, but not via company-to-company “no hire” clauses. Continue reading “We Are Hiring: PA Superior Court Upends the Law on “No Hire” Agreements”